Operating under a gambling licence of the federal state of Schleswig-Holstein.
PRIVATE operators who want to lawfully provide their services on the German gambling market had a difficult decision to make in 2012.
Would it make sense to apply for a licence under the Schleswig-Holstein regime, according to which online sports betting as well as online casino games such as online poker were permitted, whereas the other 15 federal states of Germany only allow a maximum of 20 online sports betting providers to apply for a licence within a complicated and non-transparent tender procedure?
What could be the outcome of a Schleswig-Holstein licence, taking into account the expenses and the legal uncertainty involved?
1. Background – legislative environment
a. The Schleswig-Holstein model Germany’s northern state of Schleswig-Holstein enacted its own Gambling Act rather than joining the Interstate Treaty on Gambling along with the other 15 federal states (the “Länder”). The Schleswig-Holstein Gambling Act (the “Schleswig-Holstein Act”) came into force on January 1, 2012. Under the terms of the new legislation, an extensive liberalisation of the gaming market in Schleswig-Holstein was to be expected. The key points of the law included: - Private operators could apply for a licence which would be valid for six years, - Number of licences was not limited, - Operators would have to pay a 20 per cent tax on gross profit, - Advertising would be allowed provided that certain conditions are met.
However, the government of Schleswig-Holstein changed after elections held in May 2012. The new socialist government repealed its gambling legislation. As of February 2013 and despite the EU commission raising a number of objections regarding the Interstate Treaty, Schleswig-Holstein became a signatory to the Interstate Treaty on Gambling. . Until this time 25 licences for sports betting and 23 licences for online casino games had been handed out in Schleswig-Holstein. Despite adopting the Interstate Treaty the Schleswig-Holstein Gambling Act remains in force for the licences already issued.
b. German Interstate Treaty on Gambling (the “Interstate Treaty”) In contrast, the other 15 Länder adopted a revised Treaty in December 2011 which came into effect in 14 of the 15 Länder on July 1, 2012. The key points of the Interstate Treaty include: - Number of sports betting licences is limited to 20, - Ban on online casino games and online poker, - Operators will have to pay a five per cent tax rate on turnover, - Advertising is restricted. Advertising on TV and in the internet requires prior approval.
A Europe-wide tender procedure which is organised by the State of Hesse started in August which gave private operators less than one month to file applications hoping to obtain one of the limited numbers of licences available under the Interstate Treaty. The deadline for the applications in the first phase was September 12, 2012. In this first phase, applicants had to demonstrate their corporate structure and technical expertise.
In a second phase the operators had to provide the competent authority with supplementary information in order to prove their reliability and expertise. This included the presentation of a marketing concept, a feasibility study, a social concept as well as a security concept. The authorities’ original intention was to issue the licences from beginning of May 2013. At present, the outcome of the procedure is unclear. At time of writing, a number of applicants have received invitations for presenting their concepts to the Ministry.
c. Status Taking into account the above, there are two different and opposing legal regimes in force at the same time within Germany resulting from the transitional scheme in Schleswig-Holstein. The operators with a Schleswig-Holstein licence which remain valid for a period of six years can continue to benefit from their liberal conditions whereas all other operators are subject to the much stricter regime under the Interstate Treaty.
These two systems could lead to an incoherency of the Interstate Treaty following the principles set out by the European Court of Justice. The German Federal Court of Justice has now identified this risk and has taken this opportunity to refer to the European Court of Justice four questions concerning the compliance of the German legal regime with EU law (Resolution of January 24, 2013, I ZR 171/10).
2. Commercial imperatives
On the date on which the Schleswig-Holstein Act came into force the legal situation within Germany was more than uncertain. Therefore, a considerable criterion for applying for the Schleswig-Holstein licence was that its applicability could possibly be extended to the rest of Germany. What is more, the main requirements of the Schleswig-Holstein Act were to prove the operator’s reliability, financial capacity and expertise. These key terms are to be found equally worded in the Interstate Treaty. As a matter of fact, a prejudicial effect was expected which would possibly lead to a lower investment as it was to be expected that the tender procedure according to the Interstate Treaty was based on much stricter conditions. Another decision-making criteria was the expectation that receiving a Schleswig-Holstein licence had a positive signal to the public insofar as the operator showed his willingness to make every conceivable effort to act lawfully. Moreover, the Schleswig-Holstein Act enabled the licensees to advertise lawfully, at least in Schleswig-Holstein. Of course, the operators were aware of the fact that the limitation of advertising effects on the territory of S-H would be unrealistic – a fact that was also realised by the German Federal Court of Justice in its resolution of January 24, 2013. Finally, a withdrawal of the granted licences would only be possible in exchange for adequate compensation according to German Administrative Procedure Act.
3. Regulatory clarity
The differences between the two legal systems are enormous. Basically, the S-H system shows a more liberal regulation with less restrictive conditions including the fact that online casino games are allowed. The number of licences is not limited. What is more, the Schleswig-Holstein Act was proved by the European Commission. It is obvious that the S-H approach more likely is suitable to efficiently regulate the gambling market by licensing an increased number of reliable operators. According to the Interstate Treaty only a maximum of 20 (online) sports betting licences are granted, and only for a so-called experimental phase of seven years, including a tender procedure with restrictive and unclear conditions and with a tight schedule. A strict ban on (online) casino games continues to exist. In its latest statement of December 7, 2012, the European Commission raised serious doubt regarding the compliance with EU law and threatened Germany with the opening of infringement proceedings.
4. Tax matters
a) Taxation of online sports betting - Schleswig-Holstein Gaming Duty Online sports betting: Gaming Duty (“special levy”) is levied from operators who “distribute” games of chance to players who are domiciled or resident within the Federal Republic of Germany; Gaming Duty is levied at a rate of 20 per cent which is applied on the respective gross gaming revenue; Gaming Duty will not be levied if betting activity at issue is subject to the federal Sports Bets Tax (formerly Racing Bets and Lottery Tax). - Interstate Concession Duty According to Interstate Treaty on Gambling a Concession Duty will be levied only from the holders of a concession, at a rate of five per cent of the stakes; if betting activity at issue is subject to the federal Sports Bets Tax, this tax may be credited against Concession Duty by virtue of sec 4d para 6 GlüÄndStV (consequence: Concession Duty is replaced by Sports Bets Tax liability) - Federal Sports Bets Tax Sports Bets Tax will be levied regardless of whether the operator acts lawfully or not within Germany; Bets Tax is now charged at a rate of five per cent of stakes; to the extent that an online betting operator is subject to the Racing and Sports Bets Tax, no German VAT will be charged in addition. b) Taxation of online casino gambling - Online casino gambling could potentially be subject to either the Gaming Duty imposed by Schleswig-Holstein or liable to the VAT as the general tax on consumption. - At present transactions with consumers are only subject to German VAT if the operator is based in Germany or in a state not participating in the European VAT regime. Since the European VAT regime is changing as of 2015 all casino games offered to consumers in Germany will be subject to German VAT unless they are subject to a gaming tax and therefore excluded. Due to the fact that taxation of gambling activities is not harmonised this change may have severe impact on all operators offering their services to customers in Europe.
5. Concerns as to overall position in Germany
After the final enforcement of the Interstate Treaty and after Schleswig-Holstein became a signatory to the Interstate Treaty, legal uncertainties as to the applicability of the Schleswig-Holstein licences have arisen, in particular in determining how the continued existence of those licences would affect the Interstate Treaty. A question which is now to be considered by the European Court of Justice, see above. Apart from that, further questions were raised for the operators, e.g. the taxation of online casino services. Finally, difficulties are to be expected for those operators who are licensed both under the Schleswig-Holstein regime and under the Interstate Treaty due to the contradictory regulatory systems.
6. Advantages for licensees
The advantages for S-H licensees can be summarised as follows. - Operators licensed under the Schleswig-Holstein Act can now offer their services law-fully in Schleswig-Holstein including online casino games. - Advertising for sports betting and online casino games is permitted. - Extension of validity of Schleswig-Holstein licence possible after expiry whereas so-called “experimental clause for sportsbetting“ will end seven years after enforcement of Interstate Treaty. - Schleswig-Holstein Act was notified by EU Commission whereas EU Commission raised a number of objections against Interstate Treaty and announced launching of infringement proceedings. - Schleswig-Holstein licence may improve legal position in upcoming and existing court proceedings also in the other 15 Länder.
7. Disadvantages for licensees
The following disadvantages have to be borne in mind: - Risk of double investments because high guarantees have to be provided according to Schleswig-Holstein Act and Interstate Treaty. - Issued Schleswig-Holstein licences are accompanied by supplementary clauses, non-implementation could justify a withdrawal. - Remaining lack of clarity due to legal situation.
8. Summary and outlook
Operators have to pay adequate attention to the European law dimension of online gambling regulation which of course makes it sometimes difficult to reach a legally compliant decision, especially when two contradictory legal regimes exist within one state.
It is to be expected that after the issuance of licences under the Interstate Treaty a new wave of legal proceedings will be initiated by licensees under the German Unfair Competition Act as well as by administrative authorities.
Based on previous experiences during the past 10 years in a (still) unclear regulatory environment it seems preferable for operators to show that they have undertaken all reasonable efforts to offer their services in compliance with applicable law, e.g. for a certain period of time former GDR licences enabled operators to offer their services to customers in Germany. Although the applicability and the scope of these licences have been questioned these licences turned out to be useful for a certain period of time.
Given this and keeping in mind that the present incoherent legal situation has an expiration date, it seems to be a strategic advantage for operators to act under a Schleswig-Holstein licence.
